Often we come across RBI not in a position to lower interest rates unless inflation eases or something around.
Did a bit of research and could sum up the relation between Interest Rates and Infation.
Inflation is the rise over time in the prices of goods and services.
Inflation is the natural byproduct of a robust, growing economy. No inflation, or deflation (the lowering of prices), is actually a much worse economic indicator. Also, in a healthy economy, wages rise at the same rate as prices.
A standard explanation for the cause of inflation is "too much money chasing too few goods" . This is also called the demand-pull theory. Here's how it works:
1>For several possible reasons, more money is being spent than normal. This could be because interest rates are low and people are borrowing more. Or perhaps the government is spending a lot on defense contracts during a war.
2>There's not enough supply to keep up with the rising demand for homes, cars, tanks, missiles, et cetera. Manufacturers are producing goods at a slower rate than people are demanding goods.
3>When supply is less than demand, prices go up.
Another explanation for inflation is the cost-push theory. Here's how that works:
1> For several possible reasons, the cost of doing business starts to go up independent of demand. This could be because labor unions negotiated a new contract for higher wages, the local currency loses value and the cost of exporting foreign goods goes up, or new taxes have put a strain on the bottom line.
2> It's called cost-push inflation because the rise in the cost of doing business pushes the price of products up.
Like we said earlier, lower interest rates put more borrowing power in the hands of consumers. And when consumers spend more, the economy grows, naturally creating inflation. If the board finds that the economy is growing too fast-that demand will greatly outpace supply-then it can raise interest rates, slowing the amount of cash entering the economy.
Inflation has hounded India relentlessly, pushing up prices, corroding savings, hurting the poor most and making life difficult for its large middle class.
Much of this hike in food prices is being attributed to rise in rural incomes - wages have grown by 20% annually over the last five years - which is prompting villagers to expand and move towards protein-rich diets.
There is evidence to show that people are spending more on milk, pulses, egg, fish and meat both in the cities and villages.
A lot of food rots in India because of insufficient and low quality storage facilities, leading to shortages in off-peak season.
India can tolerate high inflation if it has equitably distributed high growth.
Did a bit of research and could sum up the relation between Interest Rates and Infation.
Inflation is the rise over time in the prices of goods and services.
Inflation is the natural byproduct of a robust, growing economy. No inflation, or deflation (the lowering of prices), is actually a much worse economic indicator. Also, in a healthy economy, wages rise at the same rate as prices.
A standard explanation for the cause of inflation is "too much money chasing too few goods" . This is also called the demand-pull theory. Here's how it works:
1>For several possible reasons, more money is being spent than normal. This could be because interest rates are low and people are borrowing more. Or perhaps the government is spending a lot on defense contracts during a war.
2>There's not enough supply to keep up with the rising demand for homes, cars, tanks, missiles, et cetera. Manufacturers are producing goods at a slower rate than people are demanding goods.
3>When supply is less than demand, prices go up.
Another explanation for inflation is the cost-push theory. Here's how that works:
1> For several possible reasons, the cost of doing business starts to go up independent of demand. This could be because labor unions negotiated a new contract for higher wages, the local currency loses value and the cost of exporting foreign goods goes up, or new taxes have put a strain on the bottom line.
2> It's called cost-push inflation because the rise in the cost of doing business pushes the price of products up.
Like we said earlier, lower interest rates put more borrowing power in the hands of consumers. And when consumers spend more, the economy grows, naturally creating inflation. If the board finds that the economy is growing too fast-that demand will greatly outpace supply-then it can raise interest rates, slowing the amount of cash entering the economy.
Inflation has hounded India relentlessly, pushing up prices, corroding savings, hurting the poor most and making life difficult for its large middle class.
Much of this hike in food prices is being attributed to rise in rural incomes - wages have grown by 20% annually over the last five years - which is prompting villagers to expand and move towards protein-rich diets.
There is evidence to show that people are spending more on milk, pulses, egg, fish and meat both in the cities and villages.
A lot of food rots in India because of insufficient and low quality storage facilities, leading to shortages in off-peak season.
India can tolerate high inflation if it has equitably distributed high growth.
No comments:
Post a Comment